Liquidating a position before it was ever paid for with settled funds is considered a "good faith violation" because no good faith effort was made to deposit additional cash into the account prior to settlement date.

1. Good faith violation example, Sam:

• Cash available to trade = $0.00
• On Monday morning, Sam sells XYZ stock for $10,000 
• On Monday afternoon, he buys ABC stock for $10,000 from the above amount received

If Sam sells ABC stock prior to Tuesday (the settlement date of the XYZ sale), the transaction would be deemed a good faith violation because ABC stock was sold before the account had sufficient funds to fully pay for the purchase.

2. Good faith violation example, Tony:

• Cash available to trade = $10,000, all of which is settled
• On Monday morning, Tony buys $10,000 of XYZ stock
• On Monday mid-day, he sells XYZ stock for $10,500

At this point, Tony has not incurred a good faith violation because he had sufficient settled funds to pay for the purchase of XYZ stock at the time of the purchase. However:

• Near market close on later Monday, Tony buys $10,500 of ABC stock 
• On Monday afternoon, he sells ABC stock and incurs a good faith violation
• This trade is a violation because Tony sold ABC before Monday's sale of XYZ stock settled and those proceeds became available to pay for the purchase of ABC stock

Consequences: If you incur three good faith violations in a 12-month period in a cash account, your brokerage firm will restrict your account. This means you will only be able to buy securities if you have sufficient settled cash in the account prior to placing a trade. This restriction will be effective for 90 calendar days.